Mixed risk appetite ahead of pivotal NFP

Risk appetite fades 

Monday’s strong performance from risk assets did not last, as on Tuesday the major US equity indices posted small losses. This decline was led by technology and financial stocks, while both the utilities and real estate sectors of the S&P 500 index managed to post decent gains. Interestingly, despite the S&P 500 and Dow Jones 30 indices posting or hovering just below their all-time highs, the Nasdaq 100 index is down 4% from its recent record-high, a potential sign of rally fatigue in AI and/or a rotation by investors to more defensive stocks.

Notably, both bitcoin and ether have failed to sustainably rally above their respective $70k and $2k marks and have resumed their recent downward trend, potentially opening the door to a retest of their recent lows.

The lower US 10-year yield so far in 2026 might have played a role in the equity sector moves, but US economic data releases are probably the key factor. On Tuesday, retail sales for December produced a downside surprise, adding to concerns about the health of the US consumer, with the Atlanta Fed GDPNow estimate for the fourth quarter GDP growth revised lower to 3.7%. The market is currently pricing in 60bps of easing during 2026, up 10bps since the start of February.

Interestingly, on Tuesday, comments from Cleveland Fed President Hammack and Dallas Fed President Logan – both hawks and 2026 voters – were completely ignored, as markets are now running on Warsh fuel. Maybe Fed Board member Bowman’s remarks, due shortly after today’s labour market data, will gain more market traction.

NFP in the spotlight

The focus today shifts to the delayed January nonfarm payrolls report. Economists forecast a 70k increase in the monthly figure, driven by private payrolls, with the unemployment rate expected to remain steady at 4.4% and average earnings growth to ease to 3.6%.

There has been strong speculation about this employment report, with both White House Adviser Hassett and Trade Adviser Navarro weighing in over the past two days, essentially attempting to manage expectations in case of a downside surprise, further denting risk appetite.

This feeling is shared by key investment houses, which have been highlighting the likely negative reaction in the dollar at today’s session, also due to the annual benchmark revisions covering the April-December 2025 period that will be released today as well. That said, this negative sentiment increases the possibility of an acute market reaction, sizeably boosting the dollar, if the NFP manages to meet forecasts, or, at the extreme, climbs again above the 100k threshold.

Yen continues to rally

It has been a particularly difficult week for the dollar, posting losses across the FX spectrum, even against the pound. The decline in dollar/yen, though, has been under the market spotlight, as the pair is recording the strongest weekly sell-off since late November 2024.

Dollar/yen has dropped below a key support zone, continuing its post-election drop. The magnitude of the move suggests that BoJ officials have been probably actively trying to support the yen, through rate checks or even actual buying after the election result announcement. Low liquidity might also be playing a role today as Japan observes a rare bank holiday.

The Japanese administration has obviously won this round, also benefiting from the dollar’s broader weakness. However, the battle is potentially not over as investors may refocus on the aggressive fiscal spending expected by Takaichi once the dust settles.

Starmer prevails, pound stabilizes

PM Starmer appears to have survived the latest ordeal, garnering support from key heavyweights in the Labour party. However, it is evident that the next crisis will most likely prove fatal for his premiership. This means that, going forward, the pound will most likely exhibit higher volatility and be more susceptible to bearish moves when the lingering political unrest comes to the forefront.